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Rating action

Scope Ratings has affirmed the B+/Stable issuer rating of SkyGreen Buildings Kft. Concurrently, Scope assigned an initial BB rating for the HUF32bn senior secured bond (ISIN HU0000360201). Senior unsecured debt issued by the abovementioned entity was downgraded to B+ from BB. 

Rating rationale

The affirmation reflects Scope’s view on SkyGreen’s robust financial risk profile, supported by its unchanged cash generation capability. This is despite the lower than expected occupancy rate for newly acquired Váci Green E office property of only 37% as at end-November 2020 (71% expected as at the last review date in October). Scope believes the lower occupancy is a consequence of the weakening Budapest office market, reflecting economic changes triggered by the Covid-19 pandemic. Thus, demand is lagging the trend of previous years with vacancy rates up to 8.1% in Q3 2020 (+2.2pp YoY) and the number of transactions falling, as most market participants enter ‘wait-and-see’ mode. As a consequence, total portfolio occupancy is down to around 70% as at end-November 2020. However, the seller’s 18-month rental guarantees, covering vacant areas in the Váci E asset and starting from the sixth month after the acquisition date, will lift effective occupancy to close to 100% across the portfolio by May 2021. Furthermore, Scope believes SkyGreen will be able to up-let vacant space within the next two years. This is because demand for modern office space is still comparatively high and the spread of the Covid-19 virus is likely to be contained in the next 24 months.

The B+ issuer rating on SkyGreen benefits from the portfolio’s exposure to the second-tier investment market of Budapest, stable tenant demand with an almost fully let portfolio from May 2021 on, and relatively high profitability. The company’s credit metrics are sound, with Scope-adjusted EBITDA interest cover above 2.2x and a Scope-adjusted loan/value ratio of around 50% after the execution of its expansion strategy in 2021.

Rating constraints include the company’s limited size, which leads to greater sensitivity to unforeseen shocks and volatile cash flows, as well as the very concentrated portfolio, comprising only three properties in Budapest as at the review date, with an uneven lease maturity profile.

SkyGreen was founded in 2016 as Eiffel Square Building Kft. and is owned by an investment fund. The investors in the fund are private, in line with the current legal framework in Hungary. However, for each public offering of securities (both equity and non-equity), the issuer must disclose the ultimate beneficiaries and legal documents. Scope understands that the issuer informed investors interested in the prospective HUF 32bn (around EUR 90m) bond issuance under the MNB Bond Funding for Growth Scheme about its ultimate beneficiary owners.

Outlook and rating-change drivers

The Outlook for SkyGreen is Stable and incorporates: i) 18-month seller rental guarantees covering vacant areas in the Váci E asset, starting from the sixth month after the acquisition date, lifting effective occupancy to close to 100% across the portfolio; and ii) the successful placement of a HUF 32bn (around EUR 90m) secured bond in Q4 2020, with proceeds intended for additional real estate acquisitions (around EUR 95m, at a net initial yield of a minimum of 5.5%). Driven by the expected portfolio expansion, Scope-adjusted EBITDA interest cover is forecast at above 2.2x and the Scope-adjusted loan/value ratio at around 50% in the next few years.

A positive rating action is remote but may be warranted if SkyGreen can significantly improve its business risk profile. This could be achieved by the company substantially growing in size, leading to a less concentrated portfolio and strengthening its market position, while sustaining a Scope-adjusted loan/value ratio of below 50%.

A negative rating action is possible if leverage increases notably, indicated by a Scope-adjusted loan/value ratio of over 60% on a sustained basis. The Scope-adjusted loan/value ratio could increase if property values in the portfolio drop significantly due to a sudden shock to the Hungarian market or if the company continues to finance new acquisitions with external financing and a lower share of equity.

Long-term and short-term debt ratings

The company’s financial debt includes a bank loan (EUR 43m as of October 2020) secured by the existing portfolio (Millenaris Classic and Váci Greens D). SkyGreen intends to issue a HUF 32bn (around EUR 90m) senior secured corporate bond under the Hungarian National Bank’s Bond Funding for Growth Scheme. The planned bond has a 3% fixed coupon (to be paid on an annual basis), 3% yearly amortisation starting in the second year after issuance, and a tenor of 10 years. SkyGreen can only use the proceeds from the bond issuance to acquire such office building that meets the following criteria:

a) It has a certificate of BREEAM Very Good, BREEAM Excellent, BREEAM Outstanding, LEED Gold or LEED Platinumb)

b) It is classified as being at least a CLASS A building

c) It is located in Budapest, with the exception of properties which: i) meet the Criteria of Countryside Location or ii) are approved by the Security Agent

d) It is free of any liens, charges, or encumbrances or the existing burdens of the property are discharged within the framework of the transaction. 

The company will provide a first-ranking pledge on the newly acquired assets (Váci Greens E and the asset to be acquired in 2021 using the bond proceeds).

Scope’s recovery analysis assumes a potential default in 2022 and is based on SkyGreen’s liquidation value, considering its planned investments in the next few years. As per Scope’s methodology and reasonable discounts on the company’s asset base, an ‘excellent’ recovery is expected for senior secured debt. However, Scope only applies a two-notch uplift on the company’s issuer rating of B+ due to uncertainty around liquidation values (given the relatively low pre-letting ratio of the Váci Greens E and the weakening Budapest office market) as well as execution risk around the further portfolio expansion. Therefore, Scope has assigned a BB rating to the senior secured bond (ISIN HU0000360201).

Scope’s expects an ‘excellent’ recovery for SkyGreen’s senior unsecured debt. However, the recovery expectations for senior unsecured debt are subject to the final size and conditions of any higher-ranked debt, the collateral provided to secured debt holders, and the company’s ability to execute its acquisition strategy. As a result, Scope has not added two potential notches of uplift to the issuer rating due to risk and the possibility that senior secured debt will increase in the path to default (volatility of capital structure and share of senior unsecured debt). Scope has therefore downgraded the debt class rating to B+ from BB.

Stress testing & cash flow analysis
No stress testing was performed. Scope performed its standard cash flow forecasting for the company.

Methodology
The methodologies used for these ratings and/or rating outlook (Corporate Rating Methodology, 26 February 2020; Rating Methodology: European Real Estate Corporates, 17 January 2020) are available on https://www.scoperatings.com/#!methodology/list.
Information on the meaning of each rating category, including definitions of default and recoveries can be viewed in the “Rating Definitions - Credit Ratings and Ancillary Services” published on https://www.scoperatings.com/#!governance-and-policies/rating-scale. Historical default rates of the entities rated by Scope Ratings can be viewed in the rating performance report on https://www.scoperatings.com/#governance-and-policies/regulatory-ESMA. Please also refer to the central platform (CEREP) of the European Securities and Markets Authority (ESMA): http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. A comprehensive clarification of Scope’s definitions of default and rating notations can be found at https://www.scoperatings.com/#governance-and-policies/rating-scale. Guidance and information on how Environmental, Social or Governance factors (ESG factor) are incorporated into the rating can be found in the respective sections of the methodologies or guidance documents provided on https://www.scoperatings.com/#!methodology/list.
The rating outlook indicates the most likely direction of the rating if the rating were to change within the next 12 to 18 months.

Solicitation, key sources and quality of information
The rated entity and/or its agents participated in the rating process.
The following substantially material sources of information were used to prepare the credit rating: public domain, the rated entity, the rated entities’ agents and Scope internal sources.
Scope considers the quality of information available to Scope on the rated entity or instrument to be satisfactory. The information and data supporting Scope’s ratings originate from sources Scope considers to be reliable and accurate. Scope does not, however, independently verify the reliability and accuracy of the information and data.
Prior to the issuance of the rating or outlook action, the rated entity was given the opportunity to review the rating and/or outlook and the principal grounds on which the credit rating and/or outlook is based. Following that review, the rating was not amended before being issued.

Regulatory disclosures
This credit rating and/or rating outlook is issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0.
Lead analyst Philipp Wass, Executive Director
Person responsible for approval of the rating: Olaf Tölke, Managing Director
The ratings/outlooks were first released by Scope on 4 October 2019. The ratings/outlooks were last updated on 12 October 2020

Potential conflicts
Please see www.scoperatings.com for a list of potential conflicts of interest related to the issuance of credit ratings.

Conditions of use / exclusion of liability
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